Contract of Insurance, Guarantee and Indemnity distinguished

In a contract of insurance, pure and simple, insurer is not a surety. Insurer does not undertake to pay the original debt but undertakes to pay new debt which arises out of the contract of indemnity. A contract expressed in the form of a policy may nevertheless be a guarantee.

In a contract of guarantee, there must always be three parties in contemplation: a principal debtor (where liability may be actual or prospective) a creditor and a third party who in consideration of the same act or promise on the part of the creditor, promises to discharge the debtor’s liability if the debtor failed to do so.

In a contract of indemnity, however, the promisor makes himself primarily liable and undertakes to discharge the liability in any event. The risk of default by a debtor can be insured against as effectively as the debt can be guaranteed.

Continuing Guarantee( Sec 129):

A guarantee which extends to a series of transactions is called a “continuing guarantee”


1. A, in consideration that B will employ C in collecting the rents of B’s zamindari, promises B to be responsible to the amount of Rs 5,000 for the due collection and payment by C of those rents. This is a continuing guarantee.
2. A guarantees payment to B, a tea dealer to the amount of £100, for any tea he may from time to time supply to C, B supplies C. B supplies C with tea to the value of £ 100 and C pays B for it. Afterwards B supplies C with tea to the value of £100. C fails to pay. The guarantee given by A was a continuing guarantee, and he is accordingly liable to pay B to the extent of £ 100.
3. A guarantees payment to B for the price of five sacks of flour, to be delivered by B to C and to be paid for in a month. A delivers five sacks to C pays for them. Afterwards B delivers four sacks to C which C does not pay for. The guarantee given by A was not a continuing guarantee and accordingly he is not liable for the price of the four sacks.

A guarantee may cover a single or specific transaction or a series of transactions. That which covers a single transaction is called “single or specific guarantee” while that which covers series of transactions is called a “continuing guarantee.” Series of transactions implies series of separate and distinct future transactions. For instance guarantee for the conduct of a servant appointed to collect rents.

In a specific guarantee, the liability of surety exists only to a single or specific transaction, while in a continuing guarantee his liability is not restricted to a single transaction but to a series of transactions. Surety becomes liable for the unpaid balance at the end of the guarantee. Whether the guarantee is a continuing one or not depends on the intention of the parties, language of the guarantee, relative position of the parties at the time the instrument is written and the surrounding circumstances. In a continuing guarantee, surety can limit his liability as to the time or to the amount of the guarantee.

It must be noted that a guarantee for the payment of a certain sum by installments within a definite time is not a continuing guarantee.

Revocation of a continuing guarantee:

A continuing guarantee can be revoked only as to ‘future transactions’ in any of the following ways:

By notice: (Sec 130) A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.

A notice of revocation by the surety at any time to the creditor is sufficient to revoke a continuing guarantee as to the future transaction. Notice by surety must be clearly and specifically given. The liability of surety ceases from the date of his service of notice upon the creditor. The surety however, continues to be liable for the past transactions, for the liability already incurred or acts already done prior to the notice.


1. A, in consideration of B’s discounting at A’s request bills of exchange for C, guarantees B, for twelve months, the due payment of all such bills to the extent of Rs 5,000. B discounts bill for C to the extent of Rs 2,000. Afterwards at the end of three months, A revokes the guarantee. The revocation discharges A from all liabilities to B for any subsequent discount. But A is liable to B for Rs 2,000 on default of C.
2. A guarantees to B to the extent of Rs 10,000 that C shall pay the bills that B shall draw upon him. B draws upon C. C accepts the bills. A gives notice of revocation. C dishonors the bills at maturity. A is liable upon his guarantee.

A specific guarantee cannot be revoked by notice if the liability has already occurred.

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